Levered ETF's--Portfolio Salvation or Damnation?

hard not to come to the conclusion that these leveraged etfs are massive, massive contributors to the markets. Certainly many, many nice trades and meals for the short term sp trader.
 
Here's something else I think you should know.

Look at how SRS (2x short RE) compares to IYR (1x long RE). Below is a scatter plot with a regression line from mid Aug 08 -- present. Each point represents one day's prices. For example, the point in the upper left hand corner is from Nov 20 when IYR closed around 25 and SRS closed around 260. This correlation isn't very good and if you're trading SRS to short the RE index you might be disappointed.

The 11 lowest points on the left below the line are from Dec when VIX has been coming down in addition to IYR. That tells me volatility is important so let's look at that next.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2234855>
Quote from Rex84:

I own the SRS. Wish I would have known about this. I hope my losses are offset by the dividend I will receive.
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Here's SRS and VIX. The leftmost points are from Aug and early Sep before the crash. My take is that SRS is a better hedge against huge downside volatility than it is a shorting vehicle for the RE index.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2234859>
 

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Finally, here's URE (2x long RE) and IYR. Huge difference and not surprisingly you'll get similar results when you compare SDS and SSO with SPY.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2234864>
 

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Quote from AAAintheBeltway:

After carefully reading his article, I still don't understand why they don't track the indexes.
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If you hold these things for longer terms, every bit of daily slippage gets compounded, daily, for the length of your hold. As a banking wizard of old once said, compounding is the eighth wonder of the world.

If you hold a 2x-levered short fund that is trading for less than 2x the price of the "thing being tracked", you will get all kinds of return-minimizing distortions in strong downdrafts because the tracking fund cannot sink to negative values.

Every leverage model has assumptions regarding the ambient volatility. Since we've hit volatility levels/durations never before seen, it's a safe assumption that the underlying assumptions are invalid.

Start adding up the effects of all these pretty straightforward issues and IMO there is no mystery here and not a whole lot more necessary explanation. I don't need to understand quantum physics to know a ball peen hammer to the head hurts so I should stop whacking myself with one. :)
 
Quote from Random.Capital:

I don't need to understand quantum physics to know a ball peen hammer to the head hurts so I should stop whacking myself with one. :)
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LOL. Best quote of the day !!
 
Quote from Random.Capital:

If you hold these things for longer terms, every bit of daily slippage gets compounded, daily, for the length of your hold. As a banking wizard of old once said, compounding is the eighth wonder of the world.

If you hold a 2x-levered short fund that is trading for less than 2x the price of the "thing being tracked", you will get all kinds of return-minimizing distortions in strong downdrafts because the tracking fund cannot sink to negative values.

Every leverage model has assumptions regarding the ambient volatility. Since we've hit volatility levels/durations never before seen, it's a safe assumption that the underlying assumptions are invalid.

Start adding up the effects of all these pretty straightforward issues and IMO there is no mystery here and not a whole lot more necessary explanation. I don't need to understand quantum physics to know a ball peen hammer to the head hurts so I should stop whacking myself with one. :)
More...

But why did some track well and others, eg SRS, didn't?
 
In many cases the double short ETFs are more highly correlated with volatility than they are with the single long ETFs, but the double long ETFs track well. This is the case with SRS, URE and IYR as I pointed out earlier in this thread and it's also the case with SDS, SSO and SPY.

The point is, make sure you understand what you're trading or you might make the right market call and not get the results you expected.

P.S. Anyone interested can easily make charts like these by downloading historical quotes from Yahoo Finance and plotting them in a spreadsheet as a scatterplot.

Here's UltraShort S&P500 vs SPY:

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2235253>

Quote from AAAintheBeltway:

But why did some track well and others, eg SRS, didn't?
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